QUESTION 1

Consider two countries called Home and Foreign. Suppose that each worker in Home can produce two cars and three TVs. Suppose that each worker in Foreign can produce three cars and two TVs. Assume that Home has four workers and that Foreign also has four workers.

1. Graph the production possibilities fronter for Home? [4 marks]
2. What is the no-trade relative price of cars in Home? [2 marks]
3. Graph the production possibilties frontier for Foreign? [4 marks]
4. What is the no-trade relative price of cars in Foreign ? [2 marks]
5. In which good does Home have a comparative advantage, and why? [3 marks]
6. In which good does Foreign have a comparative advantage, and why? [3 marks]
7. If Home and Foreign start to trade, which country will export which product? [2 marks]
8. Suppose that the number of workers doubles in Home. What happens to the Home production possibilities frontier and what happens to the relative price of cars [3 marks]